<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
----------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-11601
NATIONAL AUTO CREDIT, INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE
--------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
34-1816760
------------------------------------
(I.R.S. Employer Identification No.)
30000 Aurora Road, Solon, Ohio 44139
------------------------------------
(Address of principal executive offices and zip code)
(440) 349-1000
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED
SINCE LAST REPORT).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ----
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date: 28,547,944 shares as of November 28, 1997.
<PAGE> 2
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets -
October 31, 1997 and January 31, 1997 1
Consolidated Statements of Income -
Three and Nine Months Ended October 31, 1997 and 1996 2
Consolidated Statement of Stockholders'
Equity - Nine Months Ended October 31, 1997 3
Consolidated Statements of Cash Flows -
Nine Months Ended October 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 11
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 12
<PAGE> 3
National Auto Credit, Inc. and Subsidiaries
Consolidated Balance Sheets
(Thousands of Dollars, Except Per Share Amounts)
<TABLE>
<CAPTION>
October 31, January 31,
1997 1997
--------- ---------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,791 $ 1,756
Installment notes receivable, net 292,145 316,048
Property and equipment, net of
accumulated depreciation of
$7,029 and $ 6,264, respectively 8,757 9,224
Other assets 12,209 11,741
Deferred income taxes 21,553 11,641
--------- ---------
$ 336,455 $ 350,410
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Self-insurance claims $ 5,305 $ 13,787
Notes payable 13,835 13,354
Operating debt 78,365 66,846
Income taxes payable 4,406 6,777
Other liabilities 15,325 20,098
--------- ---------
117,236 120,862
--------- ---------
Commitments and Contingencies -- --
Stockholders' Equity
Preferred stock - $.05 par value,
authorized 2,000,000 shares,
none issued -- --
Common stock - $.05 par value,
authorized 40,000,000 shares, issued
29,893,912 and 29,845,673 shares,
respectively 1,495 1,492
Additional paid-in capital 166,011 165,605
Retained earnings, including cumulative
foreign currency translation loss
of $1,398 and $1,070, respectively 63,816 74,073
Treasury stock, at cost, 1,345,968 and
1,298,568 shares, respectively (12,103) (11,622)
--------- ---------
219,219 229,548
--------- ---------
$ 336,455 $ 350,410
========= =========
</TABLE>
See notes to consolidated financial statements.
-1-
<PAGE> 4
National Auto Credit, Inc. and Subsidiaries
Consolidated Statements of Income
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE
Interest income $ 16,201 $ 14,156 $ 49,988 $ 41,373
Fee and other income 1,389 2,007 5,215 5,095
-------- -------- -------- --------
Total 17,590 16,163 55,203 46,468
COSTS AND EXPENSES
Provision for credit losses 41,741 2,642 57,555 7,031
Operating 1,482 1,489 4,760 4,151
General and administrative 1,448 1,161 4,072 3,537
Interest 1,672 788 4,610 1,616
-------- -------- -------- --------
Total 46,343 6,080 70,997 16,335
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (28,753) 10,083 (15,794) 30,133
Provision (benefit) for income taxes (10,336) 3,419 (5,865) 10,637
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (18,417) 6,664 (9,929) 19,496
LOSS FROM DISCONTINUED OPERATIONS,
NET OF TAX -- (5,098) -- (6,917)
-------- -------- -------- --------
NET INCOME (LOSS) $(18,417) $ 1,566 $ (9,929) $ 12,579
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE
Continuing operations $ (0.65) $ .23 $ (0.35) $ 0.68
Discontinued operations -- (.18) -- (.24)
-------- -------- -------- --------
Total $ (0.65) $ .05 $ (0.35) $ . 44
-------- -------- -------- --------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (000's) 28,548 28,504 28,537 28,490
-------- -------- -------- --------
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE> 5
National Auto Credit, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Nine Months Ended October 31, 1997
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Foreign
------------------- Additional Currency
Par Paid-In Retained Translation Treasury
Shares Value Capital Earnings Adjustment Stock Total
------ ----- ------- -------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE
JANUARY 31, 1997 29,846 $ 1,492 $165,605 $75,143 $(1,070) $(11,622) $ 229,548
Net loss (9,929) (9,929)
Stock issued under
benefit plans 48 3 406 409
Treasury stock
purchases (481) (481)
Foreign currency
translation (328) (328)
------ ------- -------- ------- ------- -------- ---------
BALANCE
OCTOBER 31, 1997 29,894 $ 1,495 $166,011 $65,214 $(1,398) $(12,103) $ 219,219
====== ======= ======== ======= ======= ======== =========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 6
National Auto Credit, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (9,929) $ 12,579
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,034 2,613
Interest income on dealer advances (15,196) (9,638)
Provision for credit losses 57,555 7,031
Deferred income taxes (10,062) (1,889)
Changes in operating assets and liabilities:
Income taxes payable (2,221) (4,396)
Other liabilities (4,413) 8,525
Self-insurance claims (8,482) (6,394)
Other operating assets and liabilities, net (2,182) (998)
--------- ---------
Net cash provided by operating activities 6,104 7,433
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on installment notes receivable 110,421 89,798
Proceeds from sale of rental automobiles -- 11,125
Advances to dealers and payments of dealer holdbacks (127,450) (145,564)
Purchase of property and equipment (722) (471)
Other investing activities, net 82 (1,088)
--------- ---------
Net cash used in investing activities (17,669) (46,200)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on lines of credit (76,500) 38,100
Proceeds from revolving credit facility and
issuance of senior notes 121,500 --
Payments on revolving credit facility and senior notes (33,000) --
Payments to acquire treasury stock (481) --
Stock issued under benefit plans 409 383
Other financing activities, net (328) 319
--------- ---------
Net cash provided by financing activities 11,600 38,802
--------- ---------
Increase in cash and cash equivalents 35 35
Cash and cash equivalents at beginning of period 1,756 1,665
--------- ---------
Cash and cash equivalents at end of period $ 1,791 $ 1,700
========= =========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 4,580 $ 1,326
========= =========
Income taxes paid $ 6,381 $ 12,803
========= =========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 7
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - Summary of Significant Accounting Policies
------------------------------------------
GENERAL:
The accompanying consolidated financial statements include the
accounts of National Auto Credit, Inc. and its subsidiaries (the
"Company").
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods
ended October 31, 1997 are not necessarily indicative of the results
that may be expected for the year ended January 31, 1998. For further
information, refer to the financial statements and footnotes thereto
included in the Company's January 31, 1997 Annual Report on Form
10-K.
EARNING PER SHARE:
Earnings per share is computed on the basis of the weighted average
common shares outstanding during the period. Common share equivalents
have been excluded from this computation since they have less than a
3% dilutive effect. These calculations are made in accordance with
Accounting Principles Board Opinion (APB) No. 15 "Earnings Per
Share". The Financial Accounting Standards Board recently issued
Statement of Financial Accounting Standard (SFAS) 128, "Earnings Per
Share" which supersedes APB No. 15 and is effective for all periods
ending after December 15, 1997, earlier application not being
permitted. Earnings per share determined in accordance with SFAS 128
will not be materially different than earnings per share determined
in accordance with APB No. 15.
RECLASSIFICATIONS:
Certain prior period amounts have been reclassified to conform with
the current period presentation.
-5-
<PAGE> 8
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE B - Installment Notes Receivable, Net
---------------------------------
The components of installment notes receivable, net, are as
follows:
<TABLE>
<CAPTION>
October 31, January 31,
1997 1997
--------- ---------
(in thousands)
<S> <C> <C>
Gross installment notes receivable $ 511,224 $ 496,947
Unearned income (70,552) (72,475)
Dealer holdbacks, net of advances (73,674) (74,967)
Allowance for credit losses (74,853) (33,457)
--------- ---------
Installment notes receivable, net $ 292,145 $ 316,048
========= =========
</TABLE>
A summary of changes in gross installment notes receivable is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
----------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 514,217 $ 426,030 $ 496,947 $ 354,012
Contracts accepted 74,983 97,779 242,331 274,013
Cash collected (44,302) (44,002) (145,442) (124,192)
Charge-offs against:
Dealer holdbacks (26,558) (15,895) (64,377) (33,727)
Unearned income/allowance (7,116) (4,683) (18,235) (10,877)
--------- --------- --------- ---------
Balance, end of period $ 511,224 $ 459,229 $ 511,224 $ 459,229
========= ========= ========= =========
</TABLE>
Installment notes receivable relate to the indirect consumer
financing of used automobiles. These notes generally have initial
terms ranging from 12 to 48 months with an average initial term of 37
months and an initial gross amount of $9,500. At October 31, 1997 and
January 31, 1997, the average remaining note term was 23 and 24
months, respectively. The notes are collateralized by the related
vehicles sold. Installment notes receivable are from customers
residing in all 50 states with no individual state accounting for
more than 10% of total installment notes receivable, except for Texas
with 12.6%, North Carolina with 11.9% and Florida with 10.4%.
The accrual of interest income is suspended once a note becomes 120
days contractually past due. These non-performing notes are
charged-off against the related dealer's holdback, unearned income
and then allowance for credit losses, if necessary. At October 31,
1997 and January 31, 1997, the percent of installment notes
receivable which were greater than 120 days contractually past due
was 33.2% and 24.9%, respectively.
Dealer holdbacks are the amounts payable to member dealers from the
acceptance of retail installment contracts, net of cash advanced. The
dealer holdbacks protect the Company from potential losses associated
with the installment contracts and are not paid unless substantially
all advances, including those on non-performing loans related to a
particular dealer, have been recovered. The components of dealer
holdbacks, net of advances, are as follows:
-6-
<PAGE> 9
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE B - Installment Notes Receivable, Net (cont.)
-----------------------------------------
<TABLE>
<CAPTION>
October 31, January 31,
1997 1997
--------- ---------
(in thousands)
<S> <C> <C>
Dealer holdbacks $ 406,167 $ 392,733
Advances (332,493) (317,766)
--------- ---------
Dealer holdbacks, net of advances $ 73,674 $ 74,967
========= =========
</TABLE>
A summary of changes in dealer holdbacks, net of advances, is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------- -----------------------
1997 1996 1997 1996
-------- -------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 76,560 $ 63,168 $ 74,967 $ 52,097
Additions to holdbacks 56,036 72,675 182,285 210,347
Advances disbursed (44,445) (51,689) (138,458) (159,178)
Charge-offs of non-performing notes (26,558) (15,895) (64,377) (33,727)
Charge-offs of uncollectable advances 13,204 292 22,908 708
Other (1,123) (793) (3,651) (2,489)
-------- -------- --------- ---------
Balance, end of period $ 73,674 $ 67,758 $ 73,674 $ 67,758
======== ======== ========= =========
</TABLE>
The allowance for credit losses is maintained for earned but unpaid
finance charges, and in the event the holdback of a particular dealer
portfolio is not sufficient to ensure the recovery of any outstanding
advances. The Company assesses fees to dealers for the purpose of
supplementing this reserve. A summary of changes in the allowance for
credit losses is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 44,327 $ 28,078 $ 33,457 $ 23,284
Advance reserve fees 5,524 1,356 12,178 2,691
Provision for credit losses 41,741 2,642 57,555 7,031
Net charge-offs (16,739) (2,055) (28,337) (2,985)
-------- -------- -------- --------
Balance, end of period $ 74,853 $ 30,021 $ 74,853 $ 30,021
======== ======== ======== ========
</TABLE>
The Company recorded a provision for credit losses of $41.7 million
for the three months ended October 31, 1997 as compared to $2.6
million for the comparable period in the prior year. For the nine
months ended October 31, 1997, the provision for credit losses was
$57.6 million as compared to $7.0 million for the same period a year
ago. The increase in the provision for credit losses was primarily
the result of the Company's evaluation of the collectability of its
dealer portfolio utilizing enhanced static pool information applied
on a dealer-by-dealer basis.
-7-
<PAGE> 10
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE C - Commitments and Contingencies
-----------------------------
In the normal course of its business, the Company is named as
defendant in legal proceedings. It is the policy of the Company to
vigorously defend litigation and/or enter into settlements of claims
where management deems appropriate.
In December 1995, the U.S. Department of Labor notified the Company
of its investigation of the Company's pay practices concerning its
former employees during the period from February 1993 through
September 1995. The Department of Labor's investigation is ongoing
and potential liability, if any, cannot be estimated by the Company
at this time.
NOTE D - Notes Payable and Operating Debt
--------------------------------
The Company completed its private debt offering during the first
quarter of fiscal 1998. The related $45.0 million of 7.66% unsecured
Senior Notes have an average term of five years. During the first
quarter of fiscal 1998, the Company also entered into an unsecured
revolving credit agreement for $97.5 million with a group of
financial institutions. This facility, which replaced the Company's
previous committed facility of $50.0 million, consists of $39.0
million with a term of one year and $58.5 million with a term of
three years. The Company also has available $15.5 million of
uncommitted short-term bank lines at October 31, 1997.
Prompted by the Company's third quarter loss, the Company has
obtained waivers from its lenders, including Senior Note holders and
financial institutions participating in its Credit Agreements, for
non-compliance with the fixed charge coverage ratio covenant in
agreements related to its borrowing. Such waivers will be in effect
for third quarter reporting requirements. The Company intends to
negotiate amendments to its terms related to its credit
agreements.
Although the Company intends to negotiate longer term amendments to
its credit agreements, there can be no assurance to that effect. If
the Company is unsuccessful in its negotiations, it will, in the
absence of further waivers, result in an event of default under such
agreements and may require the Company to attempt to obtain
replacement financing which could be at less favorable terms than
those existing currently.
Amounts outstanding at October 31, 1997 were $45.0 million from the
private debt facility and $47.2 million from the revolving and
uncommitted credit facilities. Borrowings under the revolving credit
facility had an average interest rate of 6.4% at October 31, 1997 and
mature at various dates through April 20, 1998. Outstanding
borrowings at January 31, 1997 were $80.2 million and had an average
interest rate of 6.1%.
-8-
<PAGE> 11
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
--------
National Auto Credit, Inc., (the "Company") had a net loss of $(18.4) million,
or $(.65) per share for the quarter ended October 31, 1997, as compared to net
income of $1.6 million , or $.05 per share, for the quarter ended October 31,
1996.
Revenue for the quarter ended October 31, 1997 was $17.6 million compared to
$16.2 million for the same quarter of the prior year. For nine months ended
October 31, 1997, revenue was $55.2 million compared to $46.5 million in the
prior year.
Revenue in the first nine months of fiscal 1998 benefited from gross installment
contract additions of $242.3 million bringing gross receivables to $511.2
million at October 31, 1997 compared to $496.9 million at January 31, 1997. Also
contributing to increased revenue was interest on advances, as advances grew
during the year to $332.5 million at October 31, 1997 from $317.8 million at
January 31, 1997. Future growth of the portfolio is dependent on the Company's
ability to generate additional installment contracts in excess of cash collected
and contracts charged-off. The Company has established minimum portfolio
collection standards for its dealers. To date 229 dealers have been deleted,
accounting for approximately 12% of the contract volume during the last six
months. The Company will continue to monitor its dealer relationships and make
adjustments as necessary.
On Septemer 4, 1997, in an effort to maximize shareholder value, the Company's
Board of Directors retained J.P. Morgan Securities, Inc., an investment banking
firm, to assist management in examining strategic alternatives.
Results of Operations
---------------------
Revenue
- -------
Total revenue increased from $16.2 million and $46.5 million for the three and
nine months ended October 31, 1996 to $17.6 million and $55.2 million for the
comparable periods in 1997, representing increases of 8.8% and 18.8%,
respectively. These increases were the result of an increase in interest income
on advances related to the Company's installment notes receivable portfolio and
to an increase in interest income reflecting the growth in the Company's
installment notes receivable portfolio and its enrolled dealer base as follows:
<TABLE>
<CAPTION>
GROSS INSTALLMENT NUMBER OF
NOTES RECEIVABLE NUMBER ENROLLED
(IN MILLIONS) OF CONTRACTS DEALERS
------------- ------------ -------
<S> <C> <C> <C>
January 31, 1994 $ 95.7 12,900 900
October 31, 1994 171.9 24,900 1,300
January 31, 1995 196.2 28,400 1,400
October 31, 1995 320.2 48,300 2,100
January 31, 1996 354.0 53,000 2,300
October 31, 1996 459.2 65,300 2,900
January 31, 1997 496.9 70,000 3,100
October 31, 1997 511.2 75,200 3,400
</TABLE>
The Company continues to monitor the profitability of its dealer relationships
and based upon evaluations has discontinued its relationship with certain
dealers, netted from the amounts presented in the table above.
The average annualized yield of the portfolio decreased from 16.0% for the nine
months ended October 31, 1996 to 15.4% for the same period in 1997. The decrease
is attributable to the increase in non-performing installment contracts and to
the increase in the average initial term of the contract from 36 months at
October 31, 1996 to 37 months at October 31, 1997.
-9-
<PAGE> 12
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenue (Cont.)
- ---------------
Fee and other income includes principally late fees, other
miscellaneous dealer fees and warranty commissions. Revenue from these sources
decreased from $2.0 million for the three months ended October 31, 1996 to $1.4
million for the comparable period in 1997. This was the result of a decrease in
warranty commissions as the Company discontinued its warranty sales program. Fee
and other income for the nine months ended October 31, 1996 increased from $5.1
million to $5.2 million for the same period in 1997. This was due to the
decrease in warranty commissions largely offset by an increase in income from
late fees.
Provision for Credit Losses
- ---------------------------
The Company recorded a provision for credit losses of $41.7 million for
the three months ended October 31, 1997 as compared to $2.6 million for the
comparable period in the prior year. For the nine months ended October 31, 1997,
the provision for credit losses was $57.6 million as compared to $7.0 million
for the same period a year ago. The increase resulted from an increase in the
non-cash provision for credit losses relating to dealer advances. The $33.2
million increase from the prior quarter is largely due to the recording of
amounts to reflect the result of the Company's evaluation of its recoverability
of dealer advances, utilizing enhanced static pool information applied on a
dealer-by-dealer basis.
The provision for credit losses together with fees contractually
charged to member dealers are added to the allowance for credit losses. The
Company believes its credit loss reserves are adequate to absorb anticipated
credit losses, however, since there is no precise method for accurately
determining losses, actual losses could vary from current estimates. To reduce
the potential for future losses, the Company intends to modify its program and
re-evaluate the basis used to charge non-cash fees to dealers, which may reduce
its source for fee and other income.
Non-performing loans as a percent of the gross installment notes
receivable portfolio (33.2% at October 31, 1997 and 24.9% at January 31, 1997),
are expected to increase as the portfolio matures. The risk of loss to the
Company is mitigated by a security interest in the vehicle sold and dealer
holdbacks.
Operating Expenses/ General and Administrative
- ----------------------------------------------
Operating expenses and general and administrative expenses as a percent
of revenue remained relatively consistent at 16.4% and 16.5% for the three and
nine months ended October 31, 1996 and 16.7% and 16.0%, respectively, for the
same periods in 1997. The Company has begun staff reductions that will continue
into the fourth quarter in order to reduce operating expenses, as part of its
recently announced strategic initiatives.
Interest Expense
- ----------------
Interest expense of $.8 million for the three months ended October 31,
1996 increased to $1.7 million for the three months ended October 31, 1997,
primarily as a result of an increase in average operating debt of $39.4 million
to $88.2 million. There was also an increase in the effective borrowing rate
from 6.1% for the three months ended October 31,1996 to 7.0% for the same period
in fiscal 1998.
For the nine months ended October 31, 1997, interest expense increased
to $4.6 million from $1.6 million for the same period in the prior year as a
result of an increase in average operating debt of $52.2 million to $85.7
million. The effective borrowing rate increased to 6.7% for the nine months
ended October 31, 1997 from 6.0% for the same period in the prior year.
-10-
<PAGE> 13
NATIONAL AUTO CREDIT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Taxes
- ------------
The tax benefit for the three months ended October 31, 1997 was $10.3
million as compared to a tax provision of $3.4 million for the three months
ended October 31, 1996. The tax benefit for the nine months ended October 31,
1997 was $5.9 million as compared to a tax provision of $10.6 million for the
same period in the prior year. The change for both three and nine month periods
is attributable to the Company's increased provision for credit losses which
resulted in a net loss for the three and nine month periods ended October 31,
1997.
Liquidity and Capital Resources
-------------------------------
The Company's primary sources of funds include net cash provided by
operating activities, collections on installment notes receivable, and proceeds
from the Company's revolving credit facility and senior notes. In fiscal 1997,
sources of funds also included proceeds from the sale of rental automobiles.
Prompted by the Company's third quarter loss, the Company has obtained
waivers from its lenders, including Senior Note holders and financial
institutions participating in its revolving credit facility, for non-compliance
of the fixed charge coverage ratio covenant. Such waivers will be in effect
until the Company's subsequent quarterly reporting period which will end
January 31, 1998. The Company intends to negotiate amendments to the terms of
its credit agreements.
Although the Company intends to negotiate longer term amendments to its
credit agreements, there can be no assurance to that effect. If the Company is
unsuccessful in its negotiation efforts, it will, in the absence of further
waivers, result in an event of default under such agreements and may require the
Company to attempt to obtain replacement financing which could be at less
favorable terms than those existing currently.
Outstanding borrowings at October 31, 1997 totalled $92.2 million and
consisted of $47.2 million from the Company's revolving and uncommitted credit
facilities and $45.0 million from its private debt facility. Amounts available
to the Company from committed facilities totalled $56.5 million and uncommitted
facilities totalled $9.3 million at October 31, 1997.
The ratio of operating debt to total capital was 25.9% at October 31,
1997 and 22.0% at January 31, 1997. It is anticipated that debt levels will
decrease through the end of the fiscal year primarily as the results of a
reduction in dealer advances as part of changes in the Company's dealer program.
The statements contained in management's discussion and analysis of
financial condition and results of operations contain "forward-looking
statements" within the meaning of the Securities Exchange Act of 1934, with
respect to the Company's expectations for the future. Among the factors that
could cause actual results to differ materially from those forward looking
statements are the potential for greater than anticipated non-performing rates,
the potential for lower than anticipated recoverability of amounts advanced to
the Company's member dealers, the ability to obtain modifications to its current
financing agreements, and other factors as discussed in the Company's annual and
quarterly reports filed with the Securities and Exchange Commission.
-11-
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
--------
Exhibit
Number Exhibit Description
------ -------------------
27 Financial Data Schedule
Electronically filed with the Securities and Exchange
Commission pursuant to Item 601(c) of Regulations S-K.
b) Reports on Form 8-K
-------------------
No reports were filed on Form 8-K during the quarter ended
October 31, 1997.
-12-
<PAGE> 15
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL AUTO CREDIT, INC.
Date: December 15, 1997 By: /s/ Robert J. Bronchetti
----------------------- ------------------------
Robert J. Bronchetti
President and
Chief Executive Officer
and Director
By: /s/ Davida S. Howard
------------------------
Davida S. Howard
Vice President-Finance
and Controller (Principal
Financial and Accounting Officer)
-13-
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